Aswath Damodaran, professor of finance at the Stern School of Business, New York University, believes it's now the age of sector-growth stories rather than country-growth stories. Damodaran spoke to Sanjay Vijayakumar in Chennai on issues related to valuations of startups. Edited excerpts:

How does one balance the expectations of an entrepreneur with that of a private equity player?

It isn't just entrepreneurs. Everybody is unrealistic about what they think they can do. It is human nature to believe what you do is unique. A hedge fund will come in and deliver great returns. I say, rather than your returns, tell me what's unique about what you are doing. Because, you can make money for a lot of different reasons. The biggest reason sometimes is because you are lucky — you were in the right place at the right time.

Many MBAs want to start their own businesses. I ask them what do you plan to do if you are successful. And they are surprised. Because usually the question that's asked is: what are you going to do if things don't go well? If things go well, people are going to try and do what you are doing. So what I am trying to figure out from them is what have you put in place to keep the onslaught of competition away. To me, that is what separates successful businesses from unsuccessful businesses.

How do you value a startup?

Last year, we saw social media companies going public. Four months ago I was debating an analyst who was arguing Twitter was worth four times more than what it is. I asked why do you think it is worth so much. He said the size of the advertising market is going to be huge. I said yes, but it does not mean Twitter is worth a lot. I don't see the direct link. If you think Twitter is going to be winner tell me who the losers are? The analyst was projecting revenues of Twitter of about $45 billion. I said okay, but the online advertising market is right now only $120 billion.

First the online advertising market has got to become about $300 billion and Twitter has to start getting revenues not from the easy players. That's gone. It has to start getting revenues from Google and Facebook. And that's one way to bring discipline to the process. Entrepreneurs come with glowing dreams about the future. I say okay, who is going to be the loser?

From an Indian startup perspective, most valuations seem based on discounted cash-flows. Do you think that's the right way?

The reality is that the price gets set first, and valuations are there to back up the price. It makes it look like an intellectual process. I have no problem with people doing it. But I think you need to be honest with yourself about why you are paying what you are paying. You are paying it because you hope to flip it to somebody else for a higher price in two years. For a lot of venture capital and private equity players, the biggest number in the valuation is your exit multiple. That's what you think will be the earnings multiple in two-three years when you sell it out to other investors. They will continue to pay 20 times the revenue (as exit multiples) — calculate revenue for three years and multiply by 20. You can value Flipkart (this way). That's the number that is driving the transactions.

What do you think of the current slowdown in India, and its impact on valuations?

Country growth stories are taking a back seat to sector growth stories. We are a global market now. If you look at companies with high valuation, it is more sector-driven than country-driven. You could be a steel company in India and Germany and trade at low multiples, or you could be a social media company in both countries and trade at high multiples.